Platform businesses in India - Modern Monopolies?

Scalable Platforms = Modern Monopolies?

It is enticing to believe that once a platform has been created, users have been acquired, network effects would keep competition at bay and create deep moats around the business. Unfortunately, IMHO, real life is not so simple. Consider many examples:

  1. Uber had 1st mover example and yet lyft is competing successfully in USA.
  2. Yahoo! and AOL has search engines far before Google came on to the picture. And yet, Google search won.
  3. Google created app store much before apple did and yet both dominate. That being the case, there are only 2 app stores worth writing about. Nobody creates apps for Samsung app store. Why?
  4. QVC (Qurate) has 93% marketshare in discount jewellery in USA and yet VGL has grown from 1.5% few years ago to 4% marketshare and continues to acquire marketshare. Why?

The answer to all these questions would enable us to analyze platform businesses (that i define as businesses with platformness >= 0.5 [arbitrarily chosen]) from the prism of durable competitive advantages.

Google is a powerhouse of platform businesses, Google search, Google ads, YouTube, Google Maps and it is a powerhouse that churns out platforms. Then why are its valuations so low compared to many other platforms?

Durable competitive Advantages (DCA)

The key takeaway of this post that I want everyone to take away, is that network effects in platform businesses by themselves only enables fast growth due to sub-linear scaling of costs. But what really keeps competitors at bay, or leads to disruptions are durable competitive advantages.

Google

Google’s ads business was a monopoly due to their dominance over search. They continue to have dominance over search, but what has started happening slowly, is the emergence of verticals as @Bibhu has alluded to. Key among these is Amazon. Amazon ads is one of the fastest ads platforms and rightfully so. When people want things, they amazon for it, they do not google for it. THis helps amazon in 2 ways: dont need to pay google for the Amazon ad that might have redirected people to Amazon, can charge customer instead for the ad amazon shows to customer. Amazon’s total dominance in products commerce has been the primary reason for Google’s Ads moat (and indeed search moat) being penetrated.

Similarly, why was Google able to penetrate AOL or Yahoo!‘s network effects? They simply had a better product based on Larry and Sergei’s PHD thesis : The page rank algorithm. Deep technical knowledge based moats are most difficult to disrupt. You can cry at the top of Eiffel tower about user privacy, but as long as google is a better search engine than DuckDuckGo, DDG and such like would always remain limited to the eccentrics. Because users (it seems) care more about quality of search than about their own privacy. As long as that remains true, Google’s search moat is supreme. Even if it were to change, the lead they have over the next biggest in terms of just understanding the tail end of search queries (which are the hardest to deal with) is so large, the data advantage so huge, that they would still likely emerge winners even in a user privacy centric world. This is the way in which we need to evaluate businesses’ durable competitive advantages.

Facebook

Someone mentioned Facebook. Facebook’s biggest competitor right now is Google Search and Google Maps. Both are very focussed on small and medium businesses and have created many specific products like GMB (Google My business) to counter the FB threat. ALso, FB has tried to create a marketplace inside it but what they fail to understand is that someone already created eBay and it was disrupted by Amazon. FB marketplaces is unlikely to work. FB’s valuations reflects (among other things) this market understanding of the durable competitive advantages of its products.

Another very interesting thing about FB and indeed most innovators is their ability to disrupt themselves They understand that they need to disrupt themselves or risk being disrupted by someone else. This explains why FB acquired insta and whats app and successfully scaled them. Explains their attempted snapchat acquisition. Explains why Google Acquired Maps (widens the local search [searching for things near you like doctors near me] moat), explains why Google built Discover feature (we will recommend you websites before you even know you want to read it.). This ability and willingness to experiment and disrupt yourself can look stupid or foolish in the short term, but in long term, it pays off, specially as you learn from past mistakes and optimize your processes.

Amazon

What explains Amazon’s valuations (from a DCA perspective purely)? Amazon’s key insight into the business was that

  1. They need to share back scale advantage with their users. You’d be surprised but very few platform businesses are able to do this. Amazon keeps adding more and more services to their prime subscription and users are delighted. They front load the costs (value/benefits to users) and backload the profits. This creates 2 illusions (i) in the user’s mind there is the illusion of always getting good and increasing value for money. (ii) for the uninformed investor it creates the illusion of high P/E ratios.
  2. They understood that theirs is a highly commoditized industry. By focussing on user experience from the 1st year of operations (many videos available show how obsessed bezos has been with user experience). By this single stroke of genius alone they have been able to create a differentiated offering. Their competitors simply do not understand. It is herculean task to speak to customer support. Nobody wants to do that. By optimizing those workflows amazon creates that goodwill in the minds of customers and in fact they are even happy to pay a small premium for the better customer experience. (several anecdotal examples available here just ask your friends or family).

what they are doing is very basic. And yet, competitors are unable to replicate. Even intelligent ones. AWS is one of the most developer friendly development ecosystem compared to say Google Cloud. Why? It doesn’t make sense. And yet, such are the facts. Google keeps saying “our cloud is better on specs”. Guess what? Customers care more about their experience and are ready to pay up for it.

Vaibhav Global

What explains VGL’s ability to grow topline at 2x the industry and industry leader? There are 2 reasons for this:

  1. They consciously operate at half the price point of their competitors. They are able to do this while being more profitable by having labor, manufacturing, power cost arbitrage (india is cheaper). You’d be surprised by how many people, even in developed countries like USA, want inexpensive products. Anyway the whole game is discount jewellery, you’re not buying the brand (tiffany’s), then it is better to be at half the price point of your largest competitor.
  2. By being a closed platform (controlling for products and not selling 3P products) they are able to ensure a more uniform quality customer experience and optimize for the full life cycle: think of it as an optimization algorithm. You create a product X, you sell it, gather feedback (both qualitative and quantitative) and then improve the product (arbitrarily) based on the deltas. Platforms ability to do this is limited to what the 3P seller is willing to do. Vertically integrated players are able to do this much better.

Saregama

As someone rightly pointed out above, being customer facing enables you to understand end user very well and optimize for their needs directly. And intermediaries would not always be willing to share that granular data with you. This and what i said above about willingness to experiment are key reasons i love saregama’s music IP platform. They experimented with Carvaan. Only Music IP company who can actually understand user behavior patterns at a granular level. Amazon would be happy to even sell echo at a loss just to get the same data. I can see same pattern pay out in Saregama, all this user behavior data would enable them to outbid their competitors who have to rely on intermediary (streaming app’s) analytics, whatever they choose to share.

Ease my trip

IMO, aggregators are the lowest of all platforms for 2 reasons:

  1. Network effects do not play out as users tend to compare their purchases unless there is a huge user experience advantage for 1 co over the other. That is not the case with flight booking aggregators.
  2. Users life is made even easier by meta aggregators like skyscanner. It’s a race to the bottom. Your user is not on your network, the relationship is transactional in nature. Meta aggregators make this even easier.
    I would say lowest quality of DCA lies with pure digital aggregators like PayTM, EaseMyTrip etc.

e-pharmacy and sastasundar

  1. Most e-pharmacies are unable to get high customer retention and relationship is transactional. There is clear ways in which they can create a differentiated product: higher product availability, faster delivery times, but this area seems mostly commoditized to me.
  2. Reason I like SastaSundar is due to their hybrid phigital model wherein the customer establishes a somewhat similar relationship with HealthBuddy as a RelationShip manager at a Bank or such like. The storefront also enables higher higher word of mouth marketing. They are clearly able to capture some part of market which doesnt obsess over delivery speeds.
  3. In general i think differentiated experience offering OR scale are the only way to succeed in aggregator space. SS is going more for former right now IMO although they do have plans for aggressive expansion when they are able to raise funds.

Disc:

  1. I am invested in Vaibhav Global, Saregama and Sastasundar and thus positively biased. Cannot speak about businesses I do not understand.
  2. Work at Google. All the knowledge shared is public knowledge.
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